Assume you are the manager of Abba Cable Company, which provides commercial comm

Question

Assume you are the manager of Abba Cable Company, which provides commercial communication services to the town of Canyon Lake, Texas. Because of licensing restrictions in the market, only your company and two others (Babba and Cabba) are allowed to operate in this market. The three companies decide to form a cartel and divide the market shares such that each company will provide services that will maximize its profits. The licensing restrictions allow each company to sell as much as it wants at a price ceiling of $2,200. You have the following output and MC data for each company:

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Output MC ($) Q Abba Babba Cabba 1,000 2,500 2,600 2,700 2,000 2,400 2,300 2,500 3,000 2,200 2,100 2,300 4,000 2,000 2,000 2,100 5,000 2,100 2,200 2,200 6,000 2,200 2,500 2,300

Explanation / Answer

Answer:

1) We have,

Price=$2,200

Companies would produce at a point where MR=MC.

Therefore,

Output produced by Abba=6,000

Output produced by Babba=5,000

Output produced by Cabba=5,000

Hence,

Industry output=6,000+5,000+5,000=16,000

Market share for Abba=6,000/16,000=37.5%

Market Share for Babba=5,000/16,000=31.25%

Market Share for Cabba=5,000/16,000=31.25%

2) If the Maximum price reduced to $2,000

Output produced by Abba=4,000

Output produced by Babba=4,000

Output produced by Cabba=0

Hence,

Industry output=4,000+4,000+0=8,000

Market share for Abba=4,000/8,000=50%

Market Share for Babba=4,000/8,000=50%

Market Share for Cabba=0/8,000=0%

3)No there is no incentive to cheat because, no one has any option to go for cheating..

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